The economies of Southeast Asia in a dangerous middle ground between the US and China

Omar Adan

Global Courant

Reviews of Southeast Asia’s economic outlook published by the Asian Development Bank and the International Monetary Fund find reasons for optimism in 2023. “Development” of Asia, they conclude, will lead the world’s economic growth over the next two years.

Southeast Asian economies have weathered the pandemic relatively well, despite the hardships of lockdowns. The geopolitical challenges posed by increasingly hostile competition between the United States and China are one imminent threat for the prosperity of the region, but so are the perverse growth effects of protectionist policies.

Southeast Asia has benefited from limited decoupling between the Chinese and US economies, as manufacturers have moved some production processes out of China to avoid tariffs and blacklists. While some relocations have taken the form of “re-shoring”, more investment has moved to other Southeast Asian countries.

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Singapore, Vietnam, Malaysia and Indonesia registered relatively strongly inflow of foreign direct investment in the past two years. Competition between outside powers has also taken care Southeast Asian elites with negotiating power in infrastructure projects and access to finance.

But beneath these recent developments lies a deeper structure that will shape the Southeast Asian experience of heightened geopolitical tensions.

First, there is the fundamental openness of economic development in Southeast Asia. The region’s growth and industrialization depend on external markets and foreign investment. High growth has usually occurred when “internationalistCoalitions promote their core interests and create access to international markets and investments.

Southeast Asian countries also display an enormous variety of domestic institutions: the structures and embedded rules that guide action and more or less allow different development tasks.

In particular, government and private institutions shape the ability of individuals and companies to solve problems coordination, commitment and collective action. Countries that fail to overcome such problems usually fail to provide sustainable economic development.

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A clothing boutique selling locally made products in the center of Hanoi. Photo: AFP/Hoang Dinh Nam

Given Southeast Asia’s institutional diversity, we can expect continued disparity in how countries in the region will respond to current geopolitical challenges and opportunities.

Some are better equipped than others to benefit from supply chain restructuring and investment shifts driven by a desire to secure supplies or protect against geopolitical risk.

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Mineral donations coupled with nationalist policies have motivated recent investment in Indonesiawhile Thailand’s established capabilities in the automotive sector make it an attractive investment site Chinese and other investors looking to diversify.

Southeast Asian responses to geopolitical change will also be mediated by political pressure within each country. In addition to the ongoing risk of institutional corrosion due to rent-seeking elites, governments face the challenge of integrating broader political movements.

Challenges “from the bottom up” include calls for greater redistribution of wealth, for the abandonment of export-driven political economies in favor of more domestic consumption, and for a greater focus on poverty reduction. The environmental limitations of extractive growth strategies, along with the effects of climate change, also pose challenges.

Elite responses to these challenges vary widely, from attempts at greater inclusiveness to mobilizing vertical allegiances that seek to displace material grievances through the politicization of race, religion or royalty.

Finally, it is important that the region is struggling with more than a temporary escalation of competition between great powers. Southeast Asia faces the challenge of weathering power transition in East Asia.

Over the past 30 years, the region has prospered due to increasing integration into a China-focused regional economy, while the United States’ security role mitigated concerns about asymmetric interdependence.

But this strategy is not sustainable. The appeal of China’s economy – along with the political appeal of China’s development model – remains significant.

The security role of the US, on the other hand, is under pressure. Even before the rise in tension between the US and China from 2017, domestic political and economic constraints within the United States have made it less willing and able to prolong the status quo. Increases in Chinese military and technological capability contribute to this structural shift.

A general conclusion is that the development strategies and growth trajectories of the region are subject to both internal and external pressures.

Currently a degree of “friend-shoringin supply chains and increased competition between the US and China have benefited some parts of Southeast Asia. But the positive spillovers that come from geopolitical tensions create more points of potential entanglement and vulnerability.

In this file photo taken on August 26, 2020, a worker inspects disposable gloves at the Top Glove factory in Shah Alam, on the outskirts of Kuala Lumpur. Photo: AFP/Mohd Rasfan

While some companies may be forced to choose which side of aeconomic iron curtainthey will stand, others have invested in dual supply chains to serve decoupled areas of technology. In doing so, they are betting on the continued willingness of both the United States and China to tolerate this duality.

Southeast Asian countries – caught up in cross-border investment and trade relationships that cut across geopolitical divides – have, in effect, taken the same gamble.

For example, Samsung’s sizeable investments in Vietnam are being reinforced by a coalition of supporting interests which depend on Samsung’s status within the unsuspected entities of the United States. At the same time the Vietnamese economy relies largely on supply chain connections with China.

This liaison structure will expose countries in the region if security concerns from outside powers escalate further. In addition to strictly business ties, potential retaliation, blacklisting and sanctions can also threaten cross-border collaborations between companies, research institutes, universities and government agencies.

These connections mean there is ample and growing room for conflict between the US and China in local Southeast Asian economies.

Natasha Hamilton-Hart is Professor in the Department of Management and International Business at the University of Auckland and Director of the New Zealand Asia Institute.

This article was originally published by East Asia Forum and has been republished under a Creative Commons license.


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